If a taxpayer secures a low-interest disaster loan from the Small Business Administration, what effect will it have on calculating a casualty loss?
A low-interest disaster loan from the Small Business Administration must be repaid and therefore does not reduce the casualty loss amount. However, any amounts of the loan which are cancelled or forgiven are included in gross income in the year of cancellation. Additionally, insurance proceeds or other reimbursements received (or claims for reimbursement for which there is a reasonable prospect of recovery), and not required to be repaid, will reduce the casualty loss.
Generally, to figure the amount of your casualty and theft losses, you must determine the actual reduction in the FMV of lost or damaged property using a competent appraisal or the cost of repairs you actually make. Revenue Procedure 2018-08, 2018-2 I.R.B. 286, provides safe harbor methods that you may use to determine the amount of your casualty and theft losses. Under the disaster loan appraisal safe harbor method, you may use an appraisal prepared to obtain a loan of federal funds or a loan guarantee from the federal government that identifies your estimated loss from a federally declared disaster to determine the decrease in the fair market value of your personal use residential real property.
If a taxpayer’s main home was destroyed by a federally declared disaster and the taxpayer later sells the vacant land used only in conjunction with the main home, will gain from the sale of the vacant land qualify for exclusion under § 121 of the Code?
The destruction of a taxpayer’s home is treated as a sale of the home and any gain may qualify for the exclusion under § 121 of the Internal Revenue Code. Generally, a sale of vacant land that does not include a dwelling structure does not qualify as a sale of a taxpayer’s home. However, if the vacant land was owned and used by the taxpayer as part of the taxpayer’s main home and the sale of the vacant land occurs within two years from the sale of the main home, the sale of the vacant land and the sale of the taxpayer’s main home will be treated as one sale and the § 121 exclusion will apply to that sale if the taxpayer otherwise meets the requirements of § 121. See § 1.121-1(b)(3) of the Income Tax Regulations.
For example, if a taxpayer’s main home was destroyed, the taxpayer may exclude gain up to the limitation amount of $250,000 ($500,000 for certain situations involving joint returns) if the taxpayer otherwise meets the requirements of § 121 of the Code. If the taxpayer later sells the vacant land used in conjunction with the main home within two years from the date of its destruction, the taxpayer is eligible to use any unused portion of the § 121 limitation amount to exclude gain from the sale of the vacant land.
What are the rules for taxpayers who realize gain from receipt of insurance proceeds or other reimbursements for damage or destruction of a main home that is in a federally declared disaster area?
If the taxpayer’s main home is damaged, a taxpayer may elect to postpone recognizing gain under the involuntary conversion rules by investing in property similar or related in service or use to the damaged property and meeting other requirements. Generally, the taxpayer must replace the damaged property within two years after the close of the taxable year in which the gain is realized. However, if the damaged property is in a federally declared disaster area, the replacement period is four years.
If the taxpayer’s main home is destroyed, the destruction may be treated as a sale for purposes of the tax provisions governing the exclusion of gain from the sale of a principal residence. If certain conditions are met, the gain may be excluded up to $250,000 ($500,000 for certain situations involving joint returns). If the destruction exceeds the $250,000/ $500,000 limitation, the excess gain may be deferred under the involuntary conversion rules.
If your employer relocates to another location because of a federally declared disaster, how do you determine if you will be able to deduct your travel expenses?
For tax years beginning after December 31, 2017 and ending before January 1, 2026, travel expenses may only be deducted on Schedule C for taxpayers who own a business and not as a miscellaneous itemized deduction for taxpayers in the trade or business of being an employee. If this restriction does not apply, the answer will then depend on whether the employer move is realistically expected to be for less than or more than one year. A temporary assignment away from home, an assignment whose termination can be foreseen within a fixed and reasonably short period (less than one year), does not shift the “tax home.”
Therefore, a taxpayer may deduct the necessary traveling expenses in getting to his temporary assignment and also for the return trip to his tax home after the temporary assignment is completed, and his expenses for lodging and 50% of the cost of the meals while he is in the place to which he is temporarily assigned.
A taxpayer is not treated as being temporarily away from home if his period of employment exceeds one year (Code Sec. 162(a)). The one-year rule generally is not triggered by short intermittent assignments that span more than one year.
Employment away from home at a single location for a period of less than a year is treated as temporary, in the absence of facts and circumstances indicating otherwise. If employment away from home is a single location initially is realistically expected to last for one year or less, but later is realistically expected to exceed one year, then the employment will be treated as temporary until the date that the taxpayer’s realistic expectation changes (at which point the employment will no longer be “temporary”).
An indefinite assignment away from home shifts the “tax home” and the taxpayer cannot deduct expenses of travel, meals, and lodging while in the location of the “indefinite assignment.” Employment is indefinite if it lasts for more than one year, or there is no realistic expectation that the employment will last for one year or less.
May a taxpayer claim a travel expense deduction if the taxpayer is displaced by a federally declared disaster and must live and work in another locality?
The tax law generally allows business expense deductions for ordinary and necessary traveling expenses (including meals and lodging) incurred while away from home in pursuit of a trade or business. For tax years beginning after December 31, 2017 and ending before January 1, 2026, travel expenses may only be deducted on Schedule C for taxpayers who own a business and not as a miscellaneous itemized deduction for taxpayers in the trade or business of being an employee. A taxpayer’s “home” is generally the vicinity of the taxpayer’s principal place of business, as determined by all the facts and circumstances. However, if the taxpayer realistically expects to work in a single location for more than one year (or there is no realistic expectation that the work in the single location will last for one year or less), that location must be treated as the tax home (regardless of whether work actually exceeds a year).
Thus, if a displaced taxpayer lives and works in another locality, but realistically expects to return to live and work in the affected area within one year, the taxpayer may be considered to be traveling away from home in pursuit of a trade or business. If the displaced taxpayer works in more than one locality, however, the facts and circumstances must be considered to determine which locality is the taxpayer’s “home.”